Double-Dip Recession Fears Linger On

Pessimists may not prevail, yet fear of a double-dip recession persists among homeowners and industry insiders despite the economic benefits generated by government assistance programs.

Moody's warns the odds of a near-term double-dip recession have increased to one-in-four.

If that happens the rating agency estimates house prices would likely fall by another 20% before stabilizing in early 2012, "compared to the baseline outlook of a 5% drop to a trough in early 2011."

The reasons why seem obvious.

Bill Wilson, president of Americans for Limited Government, Fairfax, Va., says the country is going through a weak recovery that is slowing down as suggested by recent unemployment statistics that show steady about 9.5% unemployment and 16.5% underemployment while economic growth estimates are at only 2.4%. Now is the time for "pro-growth policies" that offer incentives for private sector job creation, permanent tax relief, and a reduction of government spending, he said, not other bailouts.

Wilson is one of a growing number of market insiders who fear a double-dip recession is possible.

Ivy Zelman, the chief executive of Selman & Associates, is "cautiously bearish" about the future of the housing market.

Part of the reason why Zelman says she is not very enthusiastic about improvements some see as the start of a recovery is the "pretty sharp slowdown" of the stimulus that the government put forth in the housing market.

Most economists expect housing starts in 2012 to gain anywhere from 125 million to 128 million units, she says, "but to put things into perspective these calculations state that if the industry gets to 150,000 housing starts in 2011 it will be about where we were in 1982, which is a recession milestone."

Whether Zelman is too bearish or too bullish is a matter of perspective. It, however, is common knowledge that the mortgage marketplace has changed significantly.

There are positives and negatives to the picture, Zelman says, but at the end of the day people will keep wondering whether the economy is in a double dip and housing is going to get another dive down.

Since foreclosures will continue to mitigate new gains from housing sales, customer spending and housing starts are important for the economy, she says, "because we have worked out through a lot of the existing inventory now the new home inventory is at a 40-year low." And that is a reason to have confidence that new production will continue to replace what has been absorbed. "You have to believe that we are on the way to recovery to justify any type of new construction" which judging from the job market is not very encouraging.

Also, consumers are not going to flood the market anytime soon. While increased public awareness about the mortgage market crisis has been one of few positive side effects of the foreclosure crisis, it also has generated more realistic, if not pessimistic views about the market.

Zillow's second quarter Homeowner Confidence Survey found that 33% of homeowners are more pessimistic about the short-term future of home values in their local market than they have been in the past three quarters. Another 38% believe prices have already reached bottom, while 28% of homeowners expect home values in their local market will decrease, up from 20% in the first quarter.

Stan Humphries, chief economist at Zillow.com, says homeowners "have become much more responsive to current market conditions than they were just two years ago when a more typical reaction was denial."

Only 5%, which translates into 3.8 million homes with the potential to come into the market, are "very likely" to put their house for sale in the next six months "if they see signs of a real estate market turnaround." By comparison, Zillow finds 5.2 million existing homes were sold during 2009. Housing affordability is another issue.

Zelman argues that, so far, unprecedented affordability due to depreciation, availability of foreclosed homes and record low interest rates has not helped increase sales and is not a sign that the crisis is behind us as some claim.

Only a picture of affordability that takes into account all living expenses shows real costs, she said. Despite home price gains and the fact that many people are spending roughly 17% of their income on their 30-year fixed-rate mortgage there are a number of other housing expenses, property taxes, and other costs that add to the total. Plus there are areas with negative equity along the top metropolitan areas that still are overvalued by 6% to 8%-all of which show that "the customer is in really bad shape."

Lenders and servicers are not in much better shape.

About $70 billion in nonperforming loans are stuck in the banks' balance sheets, Zelman said. They are not moving into REO because banks are trying to come up with workouts, modifications, while some of these as REOs are in the market for sale in the hope they will generate some capital. So there is a "delay and stay strategy-and that is preventing developers activity" until banks deal with all these problem loans.

"Unfortunately we can't mitigate a recovery in the housing market because lending in up to 75% of the housing industry is dependent on bank financing," she argues, in times when so many banks have failed reducing the overall national number to about 150 banks.